A due on sale clause is a provision in a mortgage contract that requires the borrower to repay the remaining loan balance in full if the property is sold or transferred. This clause protects lenders by preventing a new owner from assuming the mortgage under potentially different terms. Common in residential and commercial real estate, a due on sale clause ensures that the original loan agreement ends when ownership changes, allowing lenders to renegotiate terms or issue a new loan to the buyer.
A financial advisor can assist you as you buy or sell a property, helping you update your financial plan to reflect the transaction.
A due on sale clause is triggered when a property owner transfers ownership through a sale, gift or other means without the lender’s consent. Once triggered, the lender has the legal right to demand immediate repayment of the outstanding mortgage balance. This clause is typically included in mortgage contracts to maintain control over the loan terms and prevent unauthorized transfers.
For the clause to take effect, lenders often monitor property title changes through public records. If a transfer is detected, the lender can enforce the provision. However, depending on the loan agreement and applicable laws, some transfers may be exempt from triggering the clause, such as those involving inheritance, divorce settlements or transfers to living trusts.
Borrowers looking to sell or transfer property with an existing mortgage must either pay off the loan or obtain the lender’s approval, which may involve renegotiating the loan terms. Failure to comply with a due on sale clause can result in foreclosure, as the lender retains the right to seize the property if repayment demands are not met.
A woman shakes hands with another person from behind her desk.
SmartAsset and Yahoo Finance LLC may earn commission or revenue through links in the content below.
Not all mortgages include a due on sale clause, but they are a standard feature in most conventional loans. These clauses are commonly found in fixed-rate and adjustable-rate mortgages, ensuring lenders can maintain control over loan terms if the property changes ownership.
However, certain types of government-backed mortgages do not always include a due on sale clause. These loans often allow assumptions, enabling qualified buyers to take over the existing mortgage. Examples include:
Additionally, private mortgages or seller-financed agreements may not contain a due on sale clause unless explicitly stated. Borrowers should review their loan documents carefully to understand whether this provision applies to their mortgage and how it may impact future property transfers.
An assumable mortgage allows a buyer to take over the seller’s existing loan, including its interest rate and repayment terms, without triggering full repayment. These mortgages are common in government-backed loans like FHA, VA and USDA loans, where qualified buyers can assume the loan with lender approval. Assumable mortgages are particularly attractive in rising interest rate environments, as they let buyers benefit from older, lower rates.
The key difference between an assumable mortgage and one that includes a due on sale clause lies in flexibility – the former facilitates easier property transfers, while the latter prioritizes the lender’s ability to renegotiate terms with new borrowers.
While a due on sale clause is legally binding, there are specific circumstances in which it may not be enforced or can be avoided altogether. One common exception is when property ownership is transferred under protections provided by federal law.
For example, the Garn-St. Germain Depository Institutions Act of 1982 prohibits lenders from enforcing a due on sale clause in certain scenarios, such as transfers between spouses, transfers to a living trust where the borrower remains the beneficiary or when the property is inherited by a relative.
Additionally, some lenders may choose not to enforce the clause, particularly if the new owner is creditworthy and agrees to assume the existing loan. In these cases, the lender may renegotiate terms rather than demand full repayment.
Borrowers considering transferring property without triggering a due on sale clause can consult with their lender to request consent or explore creative strategies, such as rent-to-own agreements or installment sales, which may provide alternatives. However, it’s important to seek legal advice to ensure compliance with the terms of the mortgage contract.
Violating a due on sale clause can result in serious financial and legal consequences for the borrower. If the clause is triggered by an unauthorized property transfer, the lender has the right to demand immediate repayment of the full remaining loan balance. Failure to comply with this demand can lead to foreclosure, as the lender can initiate legal proceedings to reclaim the property.
Additionally, violating the clause may damage the borrower’s credit score, making it harder to secure financing in the future. Lenders may also impose penalties or fees as part of the enforcement process.
A close up of a person signing a mortgage contract in an office.
A due on sale clause plays a key role in shaping how mortgages function during property transfers, offering lenders control over loan terms when ownership changes. While it serves as a safeguard for lenders, its impact on borrowers depends on the type of mortgage and specific circumstances.
Lenders review financial stability up until the loan closes. Large purchases, taking on new debt or changing jobs could impact mortgage approval. Maintaining financial consistency from application to closing helps ensure a smooth lending process.
When selling a property, pricing it correctly from the start can attract more buyers and lead to a faster sale. Overpricing may deter potential buyers, while underpricing could leave money on the table. Reviewing recent comparable sales and considering market conditions can help determine an effective listing price.
A financial advisor can help you make major financial decisions and assess the impact of buying or selling properties. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
